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Dollar drops after Fed holds rates steady, risk assets gain

NEW YORK (Reuters) - The dollar weakened on Wednesday and risk assets benefited after the U.S. Federal Reserve announced it held interest rates steady in June, but signaled a possible rate cut by the end of the year.

Responding to an increase in economic uncertainty and a drop in inflation, the U.S. central bank said it “will act as appropriate to sustain” the American economy’s expansion as it approaches the 10-year mark and dropped a promise to be “patient” in adjusting rates. Nearly half its policymakers now show a willingness to lower borrowing costs over the next six months.

Seven of 17 policymakers said they expected it would be appropriate to cut rates by half a percentage point by the end of 2019, and an eighth member saw a rate cut of a quarter point as appropriate.

Against the euro, the dollar was down 0.38% to $1.123, and against the pound it was down 0.77% to $1.265. The dollar index , which measures the currency against a basket of six rivals, was down 0.45% to 97.121. The drop slowed as the market digested the news, and some initial losses were retraced.

“This was a bit more dovish than what people were expecting and that’s evident in how the market responded, especially in terms of interest rates - the two-year falling, equities responding positively and the dollar weakening,” said Jason Draho, head of Americas asset allocation at UBS Global Wealth Management.

The 2-year Treasury yield, which moves with expectations of changes to interest rates, fell near 1-1/2-year lows hit earlier this month. U.S. stock indexes turned higher, with the S&P 500 last up 0.31%.

“For the Fed, which tends to move relatively slowly, this is a sizable move. What they have done by removing the word ‘patient’ from the statement is make July into a live meeting where if the data continues to deteriorate, if there are worries about growth because of trade concerns, they would be prepared to cut rates in July,” said Draho.

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